2015 (5) TMI 920 - AT - Income Tax

Transfer pricing adjustment - international transaction of Royalty payment - Held that - The most of the key parts are registered in India, contribution of UK entity was considered to be minor as major part of designing of this India specific product , it was concluded had been done in India. In view of these facts the TPO questioned the occasion to make royalty payments to JC Bamford. Thus relying on the reasons considered by the DRP in 2007-08 assessment year the TPO in the facts of the present case adopted the same reasoning leading to rejection of assessee s claim. Loss pertaining to M/s JCB Manufacturing Ltd. as a result of the merger of the entity with the assessee company - held that - the appellant company claimed loss of JCB Manufacturing Limited ( amalgamating company ) as returned to be set off and carry forward. The AO made TP adjustment and reduced the loss in the assessment order. The appeals against TP adjustments are stated to be pending before the ITAT in the case of JCB Manufacturing Limited. The fact that only assessed loss is to be carried forward is not in dispute. In the afore-mentioned facts and circumstances, the limited prayer of the assessee is allowed.

Issues Involved:
1. Correctness of the final order passed by the AO regarding the royalty payment.
2. Adjustment of brought forward losses and unabsorbed depreciation.
3. Addition on account of notional disallowance under Section 14A.
4. Credit of taxes deducted at source.
5. Charging of interest under Sections 234A, 234B, 234C, and 234D.
6. Initiation of penalty proceedings under Section 271(1)(c).

Detailed Analysis:

1. Correctness of the Final Order Passed by the AO Regarding the Royalty Payment:
The assessee challenged the AO's final order dated 29.01.2015, which was passed under Section 143(3) read with Section 144C(1) of the Income Tax Act, 1961. The primary contention was that the issue of royalty payment had been adjudicated by the ITAT in earlier assessment years (2006-07 to 2009-10), and the same view should be followed for the current year. The assessee requested that the issue be sent back to the TPO with identical directions as in previous years. The TPO had previously rejected the assessee's method of benchmarking the royalty transaction using the TNMM method and applied the CUP method, valuing the royalty at NIL. The TPO's decision was based on the reasoning that the assessee did not provide specific reasons for the royalty payment in the TP documentation report and that the royalty constituted about 50% of the manufacturing expenses. The TPO followed the view taken in the 2007-08 assessment year, where it was concluded that there was no significant technological change warranting royalty payments. The ITAT, following judicial precedent, restored the issue to the TPO for fresh adjudication, allowing both parties to file fresh TP studies and comparables.

2. Adjustment of Brought Forward Losses and Unabsorbed Depreciation:
The assessee contended that the AO erred in rejecting the benefit of adjustment of brought forward losses and unabsorbed depreciation amounting to Rs. 34,53,80,569. The AO had reduced the loss due to TP adjustments, and the appeals against these adjustments were pending before the ITAT. The ITAT directed that the AO allow the loss as finally determined, acknowledging that only assessed loss is to be carried forward.

3. Addition on Account of Notional Disallowance Under Section 14A:
The assessee argued that the AO erred in making an addition of Rs. 2,500 on account of notional disallowance on investments by invoking Section 14A read with Rule 8D. The assessee claimed that no exempt income was earned during the year and no expenditure was incurred towards earning exempt income. However, this ground was not pressed by the assessee due to the smallness of the amount.

4. Credit of Taxes Deducted at Source:
The assessee claimed that the AO erred in not allowing the complete credit of taxes deducted at source without providing any reason. This ground was not elaborated upon in the judgment.

5. Charging of Interest Under Sections 234A, 234B, 234C, and 234D:
The assessee contended that the AO erred in charging interest under Sections 234A, 234B, 234C, and 234D. This ground was not elaborated upon in the judgment.

6. Initiation of Penalty Proceedings Under Section 271(1)(c):
The assessee argued that the AO erred in initiating penalty proceedings under Section 271(1)(c). This ground was not elaborated upon in the judgment.

Conclusion:
The ITAT restored the issue of royalty payment to the TPO for fresh adjudication, following the judicial precedent set in earlier years. The AO was directed to allow the loss as finally determined. The ground regarding notional disallowance under Section 14A was not pressed due to the small amount involved. Other grounds were not elaborated upon, and the appeal was allowed for statistical purposes. The stay petition became infructuous as a result. The order was pronounced in the Open Court on 08th May 2015.

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